Look who’s reinventing the firewall

FORTUNE — For the past few years Cisco’s firewall business has been losing market share to a much smaller rival called Palo Alto Networks. Now the network equipment giant is set to unveil its answer to Palo Alto’s disruptive technology — its own next-generation, so-called “context aware” firewall.

The announcement was made Monday afternoon, a day before the official start of the RSA Conference in San Francisco. The event was also a coming-out party for Chris Young, the new SVP of Cisco’s CSCO security and government group.

I sat down with Young last week to find out how he plans to revive Cisco’s security business and take on Palo Alto Networks (which, by the way, is expected to file for an IPO any day now). Young conceded that Palo Alto Networks was first to recognize the need for next-generation, context-aware firewalls, which can detect different applications, users and devices — not just IP addresses. But he believes Cisco can beat the competition by embedding such security features into the infrastructure equipment it sells to companies. Cisco has a vast user base, but it also has a lot of catch-up to play in the security space.

A recent report from research firm Gartner listed relative newcomer Palo Alto Networks as a leading vendor in enterprise network firewalls. The report also stated that the firewall market is undergoing a period of “dynamic evolution.”

“The story is really simple—there’s a market need for this and those guys [Palo Alto Networks] saw it early on,” Young said during last week’s interview at Cisco’s headquarters. “But what we’ve done is taken the approach of recognizing that this need exists and delivering on it but also taking it a step further and bringing another level of value.”

Part of Cisco’s value, according to Young, will be its ability to embed context-aware security capabilities into its infrastructure equipment, just like it has done with voice, video and data. “The network is the substrate that binds all these new experiences together—the apps, the data, the devices and the users,” says Young.

At Cisco’s press conference on Monday, company execs showed a demo of its new firewall technology, which lets administrators track how employees are using apps across a range of devices–for example, whether a particular user is posting or sharing videos on Facebook using an iPhone, PC or other device. It also enables companies to enforce policies, like not allowing a specific group of employees to access games on iPads.

Cisco CEO John Chambers has made it clear that the security business is now a priority. But while Palo Alto Networks launched its context-aware firewall several years ago, Cisco is launching a similar product today. In addition to bringing Young on board last November, CEO Chambers has made the security business a separate product division, a first for Cisco. “Our customers have realized that they can’t solve the security problem without the help of the network,” says Young. “Customers don’t care about how much money we make or how much we grew in the security business last year. They want security built into the network.”